Blame it on the wolverine. In March 2011, a fire destroyed the kitchens at a gold mine 110 km north of Baker Lake, Nunavut. An electrician had gone underneath the kitchen the previous day to fix a frozen pipe but needed more time, and when he returned a day later, he found a wolverine sitting there. “So he did not go to repair it, for obvious reasons,” then-president and COO of Agnico-Eagle Mines Eberhard Scherkus told CBC News. “And within the next day or so, we had a short circuit, and it went up in flames.”

The mine itself wasn’t harmed but Agnico-Eagle had to shut down activities for one month, send home more than 300 workers it couldn’t feed, and reduce its annual production target from 360,000 to 310,000 ounces. It just takes one dastardly wolverine to highlight the wisdom of business interruption insurance.

But some mines don’t see the point. Michael Butler, director of insurance of base metals at Vale in Toronto, says BI is “probably the most significant insurable risk we have,” and along with property damage, it “comprises our largest insurance spend.” But even he has “questioned the value of the coverage in the past.” Payouts are slow, policies written for industrial clients don’t always work with mines, and fluctuating commodity prices make it hard to determine premiums.

“One of the tricky parts with BI is that typically, there’s a waiting period embedded in the language,” says David Turner, vice-president and mining practice leader at Hub International in Toronto. Since waiting periods are often between 30 and 45 days, some mines “just don’t see the financial benefits of insuring sometimes.”

So they buy property coverage without a BI extension and self-insure that risk, which isn’t so different from how BI-buying mines have to work, since claims aren’t paid until the mine is up and running again.

At one operation in central Africa, conveyor belts run from two open pit gold mines to a central location. From there, ore travels along a third conveyor belt to the stockpile, where it’s stored before processing. And one day, that third conveyor belt collapsed.

“The ore from the other two conveyors couldn’t be transported,” says Anja Duess, executive underwriter for engineering at Allianz Global Corporate and Specialty in Toronto. “There were no alternatives at that point to bring it to the stockpile, which meant that the entire operation was forced to shut down, just because of the collapse of the conveyor belt.” A replacement had to be fabricated abroad and then transported back to the mine, which was in a remote part of the country. “So all in all, it took three months to get this up and running again.”

The replacement costs were covered under the property side of the mine’s insurance coverage and could be paid out once the exact price was determined. But BI claims could only be dealt with when the mine is “back in operation and you have a forensic accountant calculating” the interruption’s full financial effect. The belt, for example, broke during the dry season— normally the mine’s busiest period—and was only fixed once the rainy season had begun, when production decreases. And so the payout was higher than it would have been if the belt had broken a few months later, but it took time for an accountant to determine the correct amount.

Vale has sometimes faced years between the BI loss and the claims payout, and needed enough capital to keep running while they wait for the adjustment process to wrap up and the insurer to send a cheque. “We buy insurance in order to mitigate that financial impact [in the fiscal year the loss occurs],” says Butler, “but if it takes a few years to receive the recovery, it kind of questions the value of the BI insurance.”

And, unlike factory losses in which all stock is destroyed, a mining company submitting a BI claim hasn’t necessarily lost all ability to create profit. “So how do you value the fact that you still have ore in the ground, and at some point you can still process it?” Insurers, Butler adds, sometimes argue the payout should be less, a contention that mines—and brokers representing them—rarely appreciate.

Cap and phrase

Part of the issue is the wording in policies, which is more suited to industrial risks. And that’s where the Mining Insurance Group comes in. Launched in London in 2012, the organization sponsors working groups that draft mining-specific wordings, among other projects. BI wordings aren’t yet finalized, but members have determined several ways payouts and premiums can be calculated.

“The natural resources industry as a whole is unique in that pricing and cost don’t really follow in lockstep,” says Andrew Bourne, partner at Toronto accounting firm BDO where he works in the forensics group. The downturn in the Chinese economy, for example, has led to a downturn in commodity prices worldwide, and a metal today might be worth half of what it was worth three years ago. Enter the valuation clause, which helps clients and insurers agree—before the policy signed— on how to value business interruptions that lead to payouts. “…In some of the claims I’ve worked on, the value of production loss or sales loss would be determined based on 95 percent of the commodity price in the month after production based on the London Metal Exchange, [for] example. And it would indicate a particular commodity exchange you would reference in determining that value.”

As for premiums, some companies uses price caps to help insurers mitigate the risk of a commodity dramatically increasing in price. If coverage is purchased when gold is valued at $1,100 an ounce, for example, the policy would allow reimbursements of up to $1,150 or $1,200 an ounce, should prices rise and losses occur before renewal.

“That means if throughout the year there’s a sudden hike, we can make sure that no matter what, we won’t pay more than that price,” says Duess, who often works with such caps at Allianz. She also points out they give clients some leeway— they’ll be protected for more than they’re paying without reporting higher values. But mining companies aren’t always fans.

“There’s certainly no consensus in the market on this,” Butler says, “but certain insurers have proposed price caps, and generally my response [is] ‘What about a price floor? Could we do it both ways, if
you want to go down that road?’ And generally the conversation ends pretty quickly after that.” Clients, of course, don’t want to cap their benefits when there’s no guarantee of a premium refund if commodities take a tumble in the markets.

Best guesses

An alternative is the premium adjustment clause, which David Turner at Hub says is usually capped at 10 percent and can be as high as 20 percent. A mining company and their insurer would agree on a certain premium based on estimated commodity prices, production amounts and other factors. At the end of the year, the company “will then revisit those estimates and plug in actual numbers,” says Bourne. “So for example, if they estimated the price of the commodity is going to be five dollars a pound, and they’re going to produce 100 pounds a year, and then at the end of the year, the price was actually four dollars, and they produced only 80 pounds, they would adjust the values and the premium would be adjusted accordingly.”

Unlike price caps with no price floors, such clauses ensure clients and insurers are in the same position. “They could benefit from that clause or they could lose from that clause,” Bourne says, “so in my view, it’s a fair way of ironing out some of those estimates, some of those factors that can change.”

There are, however, downsides, including confusion over what factors need to be reviewed at the end of the year and the possibility of a major loss occurring when commodity prices dip. In that situation,
“the policyholder may receive a significant reduction in premiums,” plus the BI payout, “which doesn’t seem reasonable from the insurer’s perspective.”

Premium adjustment clauses can also cause financial uncertainty. “As a buyer,” says Butler, “if you have a big bill at the end of the year, it’s hard to budget with that. And underwriters as well would likely
want to have some certainty around their premium income… We’re buying business interruption in the tens of billions from a value perspective, and it’s complex between various sites and interdependencies.” Recalculating expenses and prices every quarter or even every year—especially for large mining companies with numerous sites—would create logistical challenges.”

The ideal solution, Butler argues, is simply being transparent about how a company calculates its BI values, and telling insurers what commodity prices are assumed in those numbers. “If an insurer says commodity X is being priced at ten dollars a ton by this company, and we’re going to provide insurance, but we feel like it’s going to move to fifteen dollars a ton, they could reflect that in the rating if they have the appropriate information. And I think a lot of the sophisticated insurers are able to do that.”

And then there’s the question of mitigation. “In every insurance policy—whether it’s in the mining industry or restaurant or retail store or whatever the case may be—there’s a duty to mitigate to a reasonable extent your continuing losses,” says Bourne. “So I would say to the policyholders, you can’t just sit around and wait for something to happen. You have to do the best you can to minimize your losses,” whether that’s bringing in temporary workers, importing ore from another site if the mine is down but the mill is working or simply running the facility harder than they normally do. “But those can have offsetting implications later on in the business,” which insurance doesn’t always cover.

Mining companies, of course, must prioritize both safety and productivity. “When something major happens at a mine site, you really have to take a look at the best way to address that issue,” says Rob Sparling, principal engineer in the materials and failure analysis group at forensic engineering firm Giffin Koerth in Toronto. “In any situation, you’re hoping that any mitigation steps don’t lead to the potential for further losses, but you can only do what you can do.”

To mitigate a partial tailings dam failure, he says, it may be more practical to build a new tailings dam, which may or may not be covered by a BI policy. “Does that achieve a better safety margin than
the original? I don’t know. It really depends on the situation. You try, as an engineer, to do everything you can to limit risk but at the end of the day, you can’t always adequately achieve the original state.”

So in the event of a loss, Turner says, companies “should respond as if they didn’t have insurance. And if [they believe] there are certain things that need to be done to mitigate a loss, then they should incur those costs. Because from an insurer standpoint, they would rather have the insured spend two dollars if it meant potentially saving five…”